As a startup founder, you pitch your company to investors and show them what it’s worth.
And at some point, you must stick a number on your valuation.
But even if you have a pretty good idea about your valuation and why, it's the investor’s job to make their own assessment.
And often, they’ll claim that your valuation is lower than you said, forcing you to give up more equity for the same amount of money.
But a low pre-seed valuation makes it more difficult to push it up later.
To call this “frustrating” would be a massive understatement.
It’s one of the most critical crossroads on a startup’s journey toward success or failure.
You have to get it right.
What can you do to stop investors from dragging down your valuation?
Let’s have a look at
- 5 steps to take before you talk about your valuation,
- 5 things you need to get right when you do talk about it, and
- 1 powerful secret skill that will change all your negotiations for the rest of your life.
1. Understand the investor's intent
Think about why investors are taking their money and putting it to work in high-risk startups before you even start pitching.
It’s a gamble, and what do they think they know about this high-stakes game that makes them likely to succeed?
In their jargon: What’s their “investment thesis”?
Now, whether they call it “investment thesis” or not, on their websites, all investors have something to say about:
- why they invest,
- with what intent, and
- into what kinds of startups.
For you, step 1 is: Find out more about their intent.
Look in the About Us, Mission or Vision section of their websites.
Find the bits that tell you why these investors do what they do.
Most of them say that quite explicitly.
Here are 2 examples:
- “Venture capital has the power to accelerate the transformation to a sustainable future. … We exist to support bold and brave founders, who are the heroes driving our green transformation.”
- “We back mission-driven founders working on transformative technology ventures solving the world’s climate challenges.”
You’ll find plenty of these kinds of statements on investor websites.
Take the time to look for this information.
Because the better you understand the investors’ intent, the better you can present your startup as fulfilling it.
Plus, one more way to check their investment thesis is by looking at the portfolio of companies they have invested in.
- What industries are these startups active in?
- What kinds of business models do they have?
- What’s their impact?
Use that information to gain a deeper understanding of your investor’s intent.
Don’t forget their need to succeed economically in highly competitive markets, no matter how idealistic you and the investors are.
This is always part of their intent:
They must protect their investment by ensuring they are getting a fair share of ownership and that your valuation aligns with
- market trends,
- industry standards, and
- your business's growth potential.
You can never disregard this financial part of their intent.
So ensure you can check all those boxes, or you’re wasting their time. And your own.
Test your valuation critically from the investors’ perspective.
2. Highlight key factors that boost the value of your startup
You have to do more than just show that your startup works if you’re going for a high valuation:
You have to show that it will be amazingly extraordinary!
Inexperienced founders go into a pitch with a template:
“I have to show the need, the market size, the biz model, the financials, the quality of the team, our gtm, the product-market fit, the growth potential, how we’ll scale, etc.”
And you do. You must be on top of all that.
But here’s the problem:
Some founders think they’ll be fine if they simply tick all the boxes.
But that’s what 99% of startups do:
They all go in to tick the boxes.
Sadly, founders who think that way prove how un-innovative they are.
Just to be sure I’m 100% clear:
All startup founders think their idea is the hottest sh*t since the invention of sliced bread.
Otherwise, they wouldn’t bother putting in grueling hours and immense energy fighting for their idea.
But for investors, your idea is primarily a business opportunity.
And it’s difficult to get investors to go beyond that.
However, that’s what you need to get a great valuation.
You need them to remove their business goggles and get as excited about your startup as you are.
And you don’t get there by “ticking boxes.”
Think of it like a painting:
If you go in to show, you’ll tick all the boxes. That’s like painting by numbers.
You can even sell a “copy” of an artwork, but it’ll never fetch the same price as the original.
Your investor knows that, and they’ll give you the valuation you deserve for painting by numbers, no more.
So, what can you do to avoid that?
Paint an original. Be an artist. Burn for what you do.
And show how you burn by highlighting the key factors first.
Here’s how that works:
- List all the success factors on your checklist – you have to know them all (incl. your USP, any intellectual property rights or patents you hold, etc.).
- Check your assumptions against comparables, and do proper market research. Make your lines of argument airtight.
- Pick the top 5 success factors and start testing them with friends, mentors, industry professionals, and potential clients – get their feedback and prioritize further.
- Make a final “top 3” prioritization of the factors where your startup stands out like crazy. These are your key factors.
- Learn how to present your key factors with the passion that drives you. Use them at the beginning of your presentation to show your investor that your startup will be a Picasso (you’re not painting by numbers).
One final tip:
There are different ways of discovering and defining what your key factors are.
If you are still at the beginning of this adventure, the methodology described in the book “Unfair Advantage” by Ash Ali and Hasan Kubba is beneficial.
What matters most:
Prep well, then go in and shine.
Shine so bright that the investor could never even consider dragging down your valuation.
Because they know you'll convince the world if you can convince them like this.
3. Build a strong team
One of your key factors can be your team.
Investors want to see that you have a strong team that can execute your business plan.
Make sure you have the right people in key roles and that they have the skills and experience needed to deliver on your promises.
Also, make a plan for employee development and retention.
Some say this doesn’t affect early investment stages in practical terms because early on, most startups don’t yet have a track record of employee retention or turnover.
But if you’ve got a strategy for keeping talent once you’ve hired it, that gives investors an extra sense of security (because they see a high turnover rate as a red flag).
Their investment will take years to bring them a return, and the more promising your team buildup looks over those years, the better.
The more you seem like someone ahead of the curve, the better.
A word of caution: Don’t try to fake it.
Either your team is impressive, and all roles are filled with credible, strong talent, or it’s not.
But you cannot fake it.
Investors check this with great scrutiny, and you're out if they feel you’ve broken trust on this issue.
So, if there’s a role you still need to fill, say so:
“We’re on track to building an amazing team, and we’re still looking for a CMO. We’re open to discussing that with you.”
Honesty is best.
This brings us to the next point.
4. Be transparent
Investors want to feel confident that they're making a good investment.
And they will do their due diligence.
This means that, right from the start, you should be transparent about your company's financials, growth potential, and any risks or challenges you face.
Don't try to hide anything from investors.
Hiding or not mentioning things will come back to bite you.
You don’t want eroded trust and a damaged reputation.
Just like in any industry, investors talk to each other.
One f*ck-up can cost you two dozen investment opportunities.
So, be upfront and honest about your startup’s strengths and weaknesses.
Of course, you’ll want to reframe weaknesses:
Learn to talk about them as potential for improvement.
And learn to ask for help in a way that makes your investor feel like a mentor who’s got something valuable to share.
Most investors see that as part of their role anyway, so it’s good to ask for help, provided it’s a clear and focused ask about a specific problem.
A no-BS approach and willingness to learn will serve you best.
5. Showcase achievements and milestones
If you’ve already achieved significant milestones, use them to create a sense of momentum.
Show the trajectory you’re moving along.
Milestones worth highlighting are:
- increased customer acquisition,
- valuable new partnerships,
- product development successes,
- market expansion, and
- top talent additions to your team.
Use these achievements to help validate your valuation.
Use them to provide evidence of your startup’s potential.
Make sure you do all this before you start talking about your valuation.
Use the sense of momentum to build excitement to create an expectation of great things to come.
If you get these 5 steps right, your investors should be all revved up and sitting on the edge of their seats.
Once you see that, you know they’re ready to start hearing about your valuation.
6. Start strong: How to anchor your valuation
When you do start discussing your valuation, make sure to go in with a strong anchor.
An anchor is a number you mention that is higher than the valuation you hope to achieve (within reason, to give you some room for negotiation).
Strong anchors also fulfill the criteria of numbers psychology:
- Odd numbers make stronger anchors than even numbers.
- Detailed numbers like 3.87 million make stronger anchors than rounded numbers (“about 4 million”).
The reason for setting anchors is simple:
Your investor will assume you’re coming in high and almost always try to drag your valuation down.
It’s part of the game.
But here’s what’s interesting:
It’s not as powerful to set extremely high anchors as firm anchors.
Strong anchors are the ones:
- that use numbers psychology (see above), and
- that you can defend rationally.
No investor will take you seriously if your initial valuation proposal is over the top.
Or will they?
Here’s a fascinating insight into using humor with an unreasonable, over-the-top anchor:
In his must-read book Pre-suasion, negotiation expert Robert Cialdini writes about a consultant who starts his fee negotiations with:
“Well, I guess I can’t charge you a million dollars for this …” (yeah, haha )
This initial-offer joke has nothing to do with the $78.300 fee he then proposes – or so it seems, right? (because it’s so far out of range)
But the opposite is true:
It massively affects how much the consultant has to haggle over whether his proposed fee will be accepted.
Because “a million dollars,” although entirely over the top, does set the seed of a mental comparison in the mind of his counterpart.
Compared to a million dollars, a fee of $78.300 sounds reasonable to the corporate executive.
The million-dollar joke's power is that it defines what the exec subconsciously compares it to.
It stops the exec from thinking about how the $78.300 fee compares to other things in a similar price range:
- a luxury car,
- a small sailing yacht, or
- an employee’s annual salary.
So, even a statement like “Well, let’s face it, we’re not at the point of a $50-million valuation … yet!” can be useful as your first salvo moving into the valuation negotiation.
- It lightens the mood.
- It shows you’ve got guts.
- It foreshadows a time when your startup will be worth $50 million.
- It sets the “unreasonable comparison” anchor.
- It makes your actual first proposal sound more reasonable.
Way to go!
Beware of these two risk factors, though:
- Your investor doesn’t go for those kinds of jokes (strict & serious type).
- This type of joke doesn’t suit your personality.
As much as it is about building new skills, negotiating your valuation is also about wearing the shoe that fits.
That goes for all the tips in this list: Play to your strengths. Focus on what suits you best.
7. Emphasize the investor's long-term benefits
Before negotiating with the investor, practice explaining how your startup’s growth and market penetration align with their values and investment goals.
And how your proposed valuation will generate incredible returns for your investor over time.
Practice with friends, family, and co-founders.
Practice with a mentor or a coach.
Get comfortable with it so that when you’re explaining it to the investor, it’ll just roll off your tongue.
And it’s not just about values and ideals.
It’s about financials, too:
Talk about your exit strategy, the IPO potential, or specific buy-out scenarios you’ve set your sights on.
Investors like founders who have thought their exit through to the end because it’s part of their thought processes and calculations.
The better you showcase the potential long-term upside for your investor, the more likely they’ll accept your valuation proposal.
8. Provide independent validation
Some investors may not (yet) trust your judgment because they think you’re too young, lack experience, or just because they don’t know you very well yet.
If that happens, bolster the believability of your proposed valuation with an independent valuation from a reputable third party.
Make sure you choose one in advance that you can suggest immediately – you don’t want your investor to pick this third party.
An independent valuation can lend credibility and provide an unbiased assessment of your business's worth.
That should address any concerns your investor may have and help to move the negotiation process forward.
9. Generate alternative options
Consider offering an alternative structure to the investment if the investor still needs to be convinced.
This could involve splitting the investment into multiple tranches, allowing the investor to invest a smaller amount initially and evaluate the company's progress before committing to the total valuation.
This approach allows the investor to see the business's potential firsthand, potentially leading to a higher valuation in later funding rounds.
Also, talk to more than one investor.
A co-investment structure with smaller size tickets should always be on the table.
Plus, openness about speaking to multiple investors gives the investor a sense of your professionalism, dedication, persistence and that they have some competition to deal with.
All of that creates incentives to keep your valuation high.
10. Be flexible
While standing firm on your valuation is crucial, remaining open to some degree of flexibility is also necessary.
Consider potential compromises to bridge the gap between your initial proposal and the investor's counteroffer.
This may involve adjusting the investment terms, equity allocation, or agreeing to additional milestones that would trigger a higher valuation in the future.
It can also mean offering the investor non-equity incentives like dividends, compensation, and more.
And now, last but not least, my secret ingredient for getting great valuations.
It’s not a secret at all.
Not when you’re talking to the world’s best persuaders.
But it was entirely new for every founder I’ve trained so far.
So, let’s get to it.
11. NVC tricks and the art of the 100% confident valuation claim
NVC is short for nonverbal communication.
Your body language and facial expressions.
Even the sound and intonation of your voice matter.
The truth is:
Almost everyone underestimates the power of nonverbal signs of confidence.
And that’s good:
It’ll give you the advantage of other people not suspecting how strongly you’re influencing them with these techniques.
I’ve taught this to dozens of founders, and they all report their successes, so I’m going to give you my 3 secret, favorite NVC techniques here:
- speak slowly and make your voice go down towards the end of the sentence,
- lean back (just a bit), and then
- envision success in silence.
The first part is what I call para-verbal:
It’s about the tone and melody of your voice.
Imagine you’re an exceptionally competent veterinarian telling a little girl that you can fix her chihuahua’s broken leg, and it’ll run and jump again, just like before it fell off the swing with her.
She’s scared, and you want to show her with 100% confidence that everything will be alright while at the same time calming her down.
So, you speak slowly and clearly, and you do something that we all do naturally when we feel confident:
Your voice goes down at the end of a sentence.
The opposite would be an upward inflection. That implies a question mark and uncertainty.
Not what you want.
So, imagine the little girl who needs you to please show 100% confidence at that moment and say your valuation with absolute certainty.
Other people (like your investor) might not be sure of what the future holds, but you are.
And after you’ve spoken, lean back.
Just a bit.
Not too much, or it’ll look like you're a slob or just playing at being cool, like a bad actor.
The art of leaning back is to do it subtly, barely noticeably.
If you get it right, this also signifies confidence.
Because it’s the opposite of leaning forward, which conveys neediness.
Some people ask:
How much is “just a bit”?
Now, while there’s no strict rule, you’ll want to lean back 7.83 degrees if you're a perfectionist like me.
Somewhere between 5 and 10 degrees.
Practice this with friends and co-founders.
Or the next time you tell your partner you think it’s their turn to take out the garbage.
One important point:
You need to be sitting for this to work.
Leaning back 7.83 degrees when you’re standing just makes you look drunk.
Finally, shut up.
Because it’s important to show that the ball is in their court and you’re comfortable with whatever they decide.
Silence is powerful. Use it.
But of course, if you shut up and look insecure doing it, that’s no good, so learn how to envision success in silence.
Negotiate more effectively – and be willing to walk away
If an investor is trying to push down your valuation, it's important to negotiate – never just give in.
Stay confident, be clear about your impact, and take the time to show your investor why your valuation proposal is appropriate.
You should also be willing to walk away from a deal when the terms are unfavorable if a low valuation would force you to give up too much equity and control over your company.
It’s never just about whether this one deal works out or not.
It’s about the long-term future of your company.
Successful founders know it’s all about winning the war, and they’re not bothered by losing a battle or two.
To sum it up:
Negotiating with investors can be challenging, especially when they try to push down your valuation.
Keeping your valuation high requires a combination of solid business fundamentals, great execution, and effective negotiation.
You can gain a decisive advantage by doing these 5 things before you start talking about your valuation:
1. understand their intent,
2. make your key success factors shine bright,
3. show that you can build a strong team,
4. be transparent, and
5. showcase your achievements.
And once you start talking about your startup’s valuation,
6. anchor it,
7. emphasize the investor’s long-term benefits,
8. provide independent validation to back up your claim of appropriacy,
9. generate alternative options,
10. be flexible, and
11. show nonverbal signs of confidence.
That way, you can increase your chances of securing funding at highly favorable conditions.